Liquidity Premia in Dynamic Bargaining Markets
Author | : Pierre-Olivier Weill |
Publisher | : |
Total Pages | : 37 |
Release | : 2008 |
ISBN-10 | : OCLC:1290896358 |
ISBN-13 | : |
Rating | : 4/5 (58 Downloads) |
Download or read book Liquidity Premia in Dynamic Bargaining Markets written by Pierre-Olivier Weill and published by . This book was released on 2008 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a search-theoretic model of the cross-sectional distribution of asset returns, abstracting from risk premia and focusing exclusively on liquidity. I derive a float-adjusted return model (FARM),explainingthe pricing of liquidity with a simple linear formula: In equilibrium, the liquidity spread of an asset is proportional to the inverse of its free float, the portion of its market capitalization available for sale. This suggests that the free float is an appropriate measure of liquidity, consistent with the linear specifications commonly estimated in the empirical literature.The qualitative predictions of the model corroborate much of the empirical evidence.